Research In Motion soars while Palm drops

BlackBerry maker hits new high on results; Palm slumps on downgrades

By

DanGallagher

SAN FRANCISCO (MarketWatch) -- Wall Street showered its favor on Research In Motion Friday morning, sending the handheld device's maker's stock to a fresh all-time high while putting pressure on rival Palm Inc.

Shares of Research In Motion
RIMM
jumped more than 20% Friday, breaking the $200 mark briefly. The stock closed trading at $199.99 with more than 30 million shares having changed hands. Normal daily volume is 6.5 million shares.

The action came after the maker of BlackBerry wireless devices posted blowout results for the quarter ended June 2 and issued a brighter forecast for the period that's currently underway.

At least four analysts upped their ratings on RIM following the results, pushing the stock past the $195 mark in early trading.

Palm
PALM, -0.44%
on the other hand, saw revenues remain largely flat for the same period as a lack of compelling new devices put a crimp in sales of its Treo line of smart phones.

Shares of Palm were trading down 5% at $15.71. Two analysts downgraded the stock following the earnings report.

Both companies reported quarterly results Thursday afternoon. The results came on the eve of the launch of Apple Inc.'s
AAPL, +1.63%
hotly anticipated iPhone -- which many expect will redefine the category of wireless computing devices.

RIM adds support

By the opening bell, Banc of America Securities, JMP Securities and Morgan Keegan had all upgraded RIM to buy ratings. RBC Capital Markets upgraded the stock from outperform to its "top pick" rating.

"We see pending growth drivers not yet in the stock," wrote Mike Abramsky of RBC, naming coming products such as a new version of the company's Pearl device as well as growth in the Asia Pacific market.

Tim Long of BofA said the company "is showing up as a big winner in our handset value share analysis." He boosted his price target on the stock to $238 from $142.

"We are more positive on the company's ability to gain value share in the handset market. We expect significant growth, as well as margin expansion, into 2008," he wrote in a note to clients.

Michael Ounjian of Credit Suisse maintained a neutral rating on the stock, noting that while RIM will continue to benefit from growth in the smart-phone sector, "we remain concerned that an increasing consumer presence will continue to pressure device margins over time."

Palm takes heat

While Wall Street was already lukewarm towards Palm, sentiment got worse following the company's results. Deutsche Bank and Kintisheff Research both downgraded the stock to sell ratings on the news.

Jonathan Goldberg of Deutsche Bank said the competitive environment in the smart-phone category "creates a need for urgency at Palm," meriting the broker's bearish rating.

"We know that Palm is working on several projects in its labs, and these could be potential hits," he wrote in a report. "However, there is no sign that anything meaningful will reach the market this year. We think the company lacks the sense of urgency they need in current market conditions."

Shares of Palm have slid about 15% since the company announced a recapitalization deal with Elevation Partners earlier this month. That deal brought former Apple exec Jon Rubinstein - who led the design of the popular iPod - on board as the company's executive chairman. See full story.

Different markets, different results

The quarterly results contrasted sharply showcasing the two rival's different competitive strengths and weaknesses. With a strong corporate sales base, demand for the BlackBerry line has remained strong -- even in the face of the iPhone launch -- while a lack of compelling devices and a largely consumer base put a crimp in Palm's sales for the period.

Research In Motion saw earnings jump 73% for the first quarter ended June 2, hitting $223.2 million compared with $128.8 million for the same period last year. Earnings per share came in at $1.17 compared with 67 cents the previous year.

Analysts had expected the company to earn $1.06 per share for the recent period, according to estimates from Thomson Financial.

Revenue for the company's quarter rose nearly 77%, coming in at $1.082 billion compared with $613.1 million last year. This also beat analysts' estimates for revenue of $1.05 billion.

At Palm, results were less impressive. The Palo Alto, Calif.-based device maker saw earnings fall to $15.4 million, or 15 cents a share, for the period ended June 1 compared with earnings of $27.2 million, or 25 cents a share, for the same period last year.

Revenue for the recent quarter also fell slightly to $401.3 million compared with $403.1 million last year.

Analysts were expecting earnings of 15 cents a share on revenue of $406.6 million for the period, according to Thomson.

Earnings took a hit as the company's expenses grew. Palm is pouring money into the development of new products in the hope of rejuvenating its sales. Research and development expenses accounted for 14% of total revenue for the fourth quarter compared to just 9% for the same period last year.

"We expect it to trend down during the fiscal year but today this investment is critical to delivering the kinds of products necessary to compete and excel in this very competitive environment," Palm CEO Ed Colligan said in a conference call with investors on Thursday.

The iPhone impact

Because Palm relies on consumers and small businesses for a greater percentage of its business, the company is expected to be more vulnerable to competition from Apple Inc.'s
AAPL, +1.63%
iPhone.

This may be a factor in the company's disappointing forecast for the current quarter. Palm expects revenue to come in between $355 million and $365 million. Earnings excluding stock-options charges are expected to come in between 7 cents a share and 9 cents a share.

This is well below analysts' expectations for earnings of 14 cents a share on revenue of $392.8 million for the period.

Executives from Palm admitted as much during a conference call with investors Thursday. Colligan said the company was taking "competitive product launches" into consideration for its guidance for the quarter.

"I don't know if it can possibly live up to the hype," he said. "But we're taking into account that there will certainly be some stall for at least a couple weeks while people check them [the iPhone] out. And they will have 30 days to return it, so we hope we'll benefit from that, if that happens."

RIM stays optimistic

By contrast, RIM predicted earnings between $1.37 per share and $1.49 per share on revenue of $1.3 billion to $1.365 billion for the period. Wall Street was looking for earnings of $1.12 per share on revenue of $1.11 billion.

The bulk of RIM's business comes from corporate customers compared with the iPhone, which is aimed more at high-end consumers. For this reason, analysts are not worried about the company losing significant business to the device, except for some possible pressure on its consumer side with its Pearl and Curve BlackBerry devices.

Underscoring the company's confidence, co-CEO Jim Balsillie actually sounded a positive note on the iPhone in the company's own conference call Thursday.

"I think they did us a great favor because they drove attention to the converged appliance base," he said.

He added that with just one carrier - AT&T - the iPhone will take up a "very narrow subset" of RIM's sales channels.

"W have always had open competition in our space, this is no different," he said. "Consumers benefit from it, and we welcome it."

In a separate announcement, RIM announced a three-for-one stock split that will take effect on Aug. 20. The company's shares have more than doubled in the past 12 months, breaking the $175 mark last week to set a new all-time high.

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